Are Colleges Silently Collapsing?

While our colleges dipping into endowments today, we're gonna take a look. Stay tuned for prudent money Good afternoon, this is Bob Brooks and you are listening to the prudent money radio show Thanks so much for joining me today. You know I do appreciate it Well the Wall Street Journal published a disturbing piece that shows the universities are having a tougher time than maybe we thought College admissions expert John Apollo is here to date today. Excuse me to give us his take. Hey John Welcome to the program Bob great to be with you. You know, it's really interesting I think that there are what a college wants you to see up front you go to the tour the campus You see the classrooms, but it's what's it what they're not telling you is what's really disturbing the trends that are starting to happen the Potential colleges that are really in financial trouble and I think that you look at really what's going on in the environment Which no it's you're really not seeing a whole lot written about it where people are putting two and two together and gone This is not good, but you look at the environment I mean the ability to borrow money has drastically changed and as you and I've spoken I think that's going to have Major impacts down the road. It just depends on how long it takes to get there You know, so I think some is fair to question whether or not the price of college is very well is way overvalued You know is it is what they're charging is it up here and then what they're really the value is down here then finally Smarter generations might just do things differently. You know, they may go to junior college for a couple years then a college So you get all this going on and then you have this what we don't want people to know Maybe we're getting money out of places. We shouldn't be touching This you know this came out in a Wall Street Journal article last week. I thought I very interesting couldn't what talked to you about it Talk a little bit about first. I guess we'll start at what an endowment is and Maybe the legal responsibility of the college to administrative yeah, Bob This is a terrific topic because the trend is really not the friend of the consumer You know, I talked about those who are trying to go to college I think on themselves as consumers of education and so This is a really interesting topic and it does start I think in large part with the money that's been squirreled away by the colleges and in this little Potomoney call the endowment and the endowment is basically gifts that have been given to the colleges and these can be public colleges and even some of the Org University systems and University of Texas is one of them the Texas system has a very significant endowment and so If I'm an alumni of the school and I am from Boston University and every once in a while I write them a check and But I don't say really what I want them to do with it So my checks aren't big enough that I can go to Boston University and say hey, by the way I'm going to write you I'll say like that the big guys do a hundred million dollar check for your endowment But I'm going to put some strings on it and I want you only to use my hundred million or the earnings on my Hundred million for this particular purpose and a donor can do that that's called a restricted gift and colleges love them because they often come in big big chunks That's how many medical schools are funded and the like so those are big gifts Someone like me who might be writing a hundred dollar check or maybe if I'm really lucky a thousand or ten thousand dollar check You know for some of those the university is going to say you know We really love your gift But it's just not big enough where we want you to tell us how we can use it So we're going to put it in the under restricted fund and we can use it for any purpose that we want But let me let me let me stop your I theory and ask this is that a you're welcome to leave the thirty thousand dollars here But it's gonna it we're not going to to restrict it. We're not gonna We're not gonna ear market for any particular purpose. We're gonna use it for wherever we want if you don't like that then But that's that's the deal is that is that what you're hearing? Yeah, that's really the deal and you know It's you can understand that by the the majority of schools are raising a hundred thousand dollar gifts way in the numbers Significantly more than they're getting the big gifts, right? So they don't want me to say to them Hey, I'll give you a hundred dollars for a purpose necessarily now some of them will like at Boston University They have the annual appeal day and I can say I wanted to go to the friends of track or you know whatever it might be So those those of funds are designated by the universities and if they're put into a particular pot Then that's what they're supposed to be used for if I give a totally unrestricted gift Just right to check to the trustees of Boston University They can put it in the endowment and use whatever they want but those restricted gifts are Intended and I say that purposely are intended to be used for the purpose that the donor wants right? That's a restricted gift for whatever fund they want to put that money in you know It was really eye opening this particular article that came out of the Wall Street Journal Do you know total loss stories where the the widow puts back thirty thousand dollars in the endowment fund for a scala as a scholarship fund Restricted obviously restricted use and she went to the board of director of board of trustees to find out You know what's in their account and and came to discover nothing it was all gone I mean that is just an absolutely disturbing story especially when you think the significance of I'm giving this an honor of my Husband right right you had passed away No, that that's right and you hit on the most important point And that is the trustees of the university who have to oversee that money and as a trustee you have a fiduciary Which is a fancy legal term which means you can't do whatever you want you have to do What's in the best interest of the university and what should be in the best interest of the university is when That widow gives that hard felt gift for one purpose the trustees have a fiduciary Responsibility to make sure that it's used correctly and what let that article said and what is known to be true is that Some schools and it's mostly the smaller schools with smaller endowments with declining enrollment All the economic factors that you and I have talked about before are now running counter to what's in the best interest of the university And somebody maybe it's the financial expert at the school With or without the knowledge of the trustee starts dipping into these Stricted funds and they're using them for purposes that are frankly illegal and now you're starting to see attorney generals across the country and Other is getting involved saying well wait a minute you just can't go and take that money, right? There's there are legal obligations the university has to use the money as the donor at once So this is clearly a big problem that's starting to develop and accelerating that's really the issue You know all this shenanigans this happens from time to time, but this is becoming more of a practice than a shenanigan in some of these schools You know what's interesting as as you as you read through one of these articles about this is that you hardly ever Hear about yeah, and the college took Went after you know in a court of law went sued The the the donor sued the university You don't really hear anything about these about these Board of trustees and maybe somebody gets fired something like that But there certainly isn't and this criminal it is I don't think I'm over exaggerating. I think to me it's it's you stole money. It's embezzlement That's right well, but you're not saying any actions being taken. What what what do you make of that? Well, I think we're starting to see actions being taken because the number of these cases are becoming more common So maybe I'm gonna say 15 or 20 years ago when there wasn't quite this pressure on the schools from all angles There may have been some bad actors who were misdirecting some funds here and there But now it seems like there were too many of them and in some high high-profile places that are doing this and there are some I think one of the that article you noted It's worth your readers going your listeners going back and taking a look at that article if they're interested because it talks about a big state like Illinois Actually the attorney general in Illinois going after a school saying you can't do this and and I happen to know this I sat on several boards as a fiduciary for For endowments and I know that that's a very significant responsibility and If there's a breach of that responsibility, it's not uncommon for the trustees to be sued individually They have no real liability insurance per se that says you you're okay just because you're a trustee now your trustee duty is to do It's right for the school and make sure that that donor money is used as advised and that's clearly not happening in some cases So do you think that There that this is the tip of the iceberg or there's a lot of a lot of college a lot of colleges a lot of universities that are really really struggling Well, you know Bob I'm a data guy So I always like to go back and say like what are that trends like my my intuition is Very much what you said at the beginning that is one schools are not gonna on their brochures or during the tours say oh by the way We're in financial trouble trouble and we're taking money out of our endowment to start paying the bills, right? They're just not gonna tell you that. So you have to dig a little deeper and you can do that. And I would say to your listeners, if they're thinking of a smaller school, particularly liberal arts schools that could be under pressure, do some just a little bit of digging. There are often articles and newspapers about things like staff cuts, budget cuts, program cuts. There may be something about the endowment and the reality is this is like all other economic situations. It's something like 20% of the college is own 80% of the endowment funds. And some of those numbers are like 50 billion, and those kinds of numbers. And then there are way too many that don't even have 100 million, which is not a huge number for a school, right? So it really comes back to that question you said earlier. There's like, how does a listener know that their school is in the right place because financially in the right place? Because they're not gonna tell you when you show up at the friendly tour. It's just not gonna happen that way. So I think again, just digging around a little bit is the best way to try to get a handle. 'Cause the end of the day, when my daughter started in college on the first day, I wanted to make sure the school is gonna be there in four years. I don't wanna hear. - I don't think about that. You would think about that because you see it. Imagine the parents who are, I would have never thought about that. - No, no, it's awful. And we've talked in the past about student loan forgiveness and one of the areas that I think the student loan for getting this program is actually really good. It's for those schools, both for profit and not for profits that close while the students right there in the middle of the course. They had no idea. They got blindsided. They show up one day and they find out they can't get in the library because the school closed. That's just not right. - This is Bob Brooks and you are listening to the Fruit and It's Money Radio. So John Apollo is with me today. If you want more information on John great website to go to mycollegecorner.com. You know, something else that, I don't know why you think it's funny, but I thought it was a little interesting when the thought went through my head. Is it, can you imagine the dedication and loyalty that graduates have to a college? Some of them are just over the top and they're probably going, "Oh, that's okay. "Which is $50,000." There's no way that they're gonna sue the great University of Alabama or some of the situation like that. - Well, that's right, but there is a pretty interesting case in Virginia of a school, it was about five or six years ago. So everything is blurred in COVID, but it's around the COVID time. Right? When the school announced they were gonna close. And the alumni came up in arms and said, "Well, we're not gonna let that happen." And they went on a big fundraising campaign to try to keep that school open. I think the end of the day they were successful. And that's a pretty rare case, but you're right. Your loyalty to college is pretty significant. Particularly if you hope that your son or daughter is gonna go there and follow your footsteps and then find out that they've had this financial difficulty, it's a real problem. And about one of the realities of this is and the trend is not a friend for the smaller schools, particularly those who were dipping into the endowment to start to pay some operating costs. But in the period of about 2010 to 2020, about 100 schools, these are traditional schools, private and public, about a hundred of them either merged or closed. So they had some kind of financial difficulties and they dealt with that by either merging or closing. In this period from 2020 to 2025, so in a five year period, about the same number of colleges and universities have closed. So that you could say is a doubling in that and the pace of that is starting to come up. And I think the reality that you said before is the one that's so striking. Who wants to be on a board of trustees or be the president of a university that's about to close, right? And so they have a personal stake in this. And I'll say this, I'm on the board of the and over Newton Seminary, now at the Yale Divinity School. And I tell you this, because 15 years ago, the and over Newton Seminary in Newton, Massachusetts was in financial trouble. They had declining enrollment, they had a big piece of property, it was in trouble. And so they went to Yale and said, look, we'd like to embed our university, our seminary at your university, to make sure that we're able to progress. And they were, I'd mention this because they were very proactive and really importantly, there was no ego involved with it. They took the reality of their financial circumstance and said, this is not sustainable. We have a really good program. Where can we merge? What can we do to make this successful? And they went to Yale, the Yale Divinity School, and they cut a deal and said over this 10 year period, we're going to slowly integrate into the Yale Divinity School. And they did that successfully. So now you have the Yale Divinity School. And I think that it's a testimony to the leaders of those organizations to be very realistic. And I always talk about in financial world, and whether this is how a family is going to pay a college bill or whatever it might be, it's not time for optimism or pessimism, but realism. Like realistically, what's happening here? And for these schools, I think it's hard for some on the Board of Trustees and the Presidents and the leaders to sort of swallow their ego and say, you know what, this is just not working. We've got to find out what's right for the institution. Instead, they're doing things like rating their endowments, which will bring the demise of the institution, just maybe not on their watch. So it's really complicated situation. And there are both scenarios where it's worked out well and some of those schools that merge, I think, have a much better outcome. They preserve their programs. And then there are others that have failed where they've had to close because they did not face the music very well and didn't have a good exit plan. - You know, it makes me wonder, do you talk about the bigger colleges that have the enormous endowments? I just wonder if, and you look at that and you go, oh, those colleges are bulletproof. But I start to wonder, are we in a situation where we're going to have to see the value, and we're going to talk a little bit about this earlier, but the value of college reset, never to go back up near or quickly go up, like it has been, it's 6% rate or whatever the inflation rate is on that. - Yes. - Just wonder if the true value that you're getting, if you're overpaying, that's just the law, the law, the way things balance. It's got to come back into balance. - Yeah, it has to get back to the equilibrium point. No question. And there's an article that was in Business Week in 2003, and I know this because it's really a seminal work. And in that article, it said that one of the problems with higher education is, and this is a direct quote, as I remember it, but it's pretty close. The traditional laws of market economics have never really applied to higher education. And then it goes on to say, it's because it's this combination of like a social good and a necessary part of our society, which is education. And so now for 23 years, that quote has stuck in my head as being true, except it's now changing. Right, I think the big, beautiful bill and some of the other things that have happened in education market, the economics of all of this have changed pretty fundamentally. And now we're starting to see colleges closing at record paces and we're starting to see the mergers, we're just gonna start seeing the program cuts. The big, beautiful bill has not yet had its effect on higher education, but in the next year or two, it's certainly well. There's no question about it. - So it makes me wonder if you, if as these medium to larger size colleges are watching these smaller private schools or whatever go under, if there's a scrambling to get these students enrolled in their own schools, they gotta be actually thinking about that, I would think. - Yeah, absolutely. And what they're doing is they're using their massive endowments now as an economic enticement. Just last week, my alma mater Boston University announced that the school be tuition free for all those who have incomes $200,000 or less. And they're not the first ones to do that. Some of the larger endowed schools, certainly the Ivy League schools and others have been making similar promises. Now, nobody should be confused to think that the Boston University experience is gonna be free. They're just saying they're not gonna charge you tuition. - Right, with a asterisk. - Yeah, a big one because they're gonna still charge you for room and board and like other things. So it's not as if you're gonna walk on that campus for free, but there is this idea that those kinds of schools with the big endowments and the big brand names, they're gonna start to use their economic power to really start to move some of the lower, I'm gonna say lower tier schools from a financial perspective. They might be excellent academic institutions, but financially they may not be viable because we know that the number of students are gonna roll on college in the next 10 years is less than the number that have enrolled in the last 10. And so the economics again are getting really difficult for the small to mid-summer. schools with low endowment dollars available for financial aid that are not there to supply the kind of economic support that the big schools and even some of the big medium-sized schools are going to get. So is this also a do you think this trend that you're saying is it hitting the graduate level pretty hard? It's going to hit the graduate level harder once we get through this next cycle or two of enrollments because again in the big beautiful bill for the first time there's a limit on how much graduate students can borrow. That's going to be a big deal. Same thing for the plus loan program whereas some of the schools were just saddling with parents with total debt meaning you know up to the cost of attendance. And so now with those those limits in place and also the limit that we haven't yet seen which is that the schools are going to have to prove that their graduates are earning more than a high school graduate. So if I'm going to to school XYZ and I'm taking a basket weaving course and I've paid I know $100,000 for it and I come out with $30,000 in debt if I'm not earning more than a high school student those the federal government's going to come in and say you're we're not going to let you borrow under the federal loan program for that particular major anymore. So this is this reckoning's coming. Very very interesting. Yes and and and and actually do you agree with I agree with. I agree I agree I I'm one of the ones who early in the in July August of 2025 who said the end of the day the reforms that the big beautiful bill is bringing to college will be helpful but it's going to be really painful for a two or three year period and we're just now starting to get into this we're through the first year of this next year we're going to see more and I think the third year we'll see even more of that so we may find ourselves talking about this pretty frequently in the next couple of years. Well it also makes you wonder as kind of wrap things up that if college gets to a point and we're seeing this I just see this through my oldest son is that really for his degree plan and what he's doing he had well had too but I think it dramatically increases his job opportunities if he actually does get the graduate degree and I just wonder how much more that's going to be the situation where you got to go both and that's a that's a hard pill swallow. Well I'm hopeful that as the economic reckoning actually takes place particularly in the graduate programs that there's a reset of what the cost is. Like let's stop building you know the climbing walls and the and the fancy gyms and all that and let's get back to just teaching kids what they need to get a job right that might be helpful. Yeah I guess it comes down to and thank you alluded to this earlier it would just be amazing to sit down with the books of most universities and you just go what it looks like a you know politicians budget you just have no idea why they're wasting so much money. Yeah that's exactly right and again we're going to watch this unfold in the next year or so as this train continues but this was not an abrint period the last two or three years this is the new reality for the colleges and I'm just hopeful that those who are sending their kids to school or thinking they've got a sophomore junior saying okay where can I go. Again think like a consumer is this going to be a viable school is the degree going to be worth the cost of it and choose wisely don't have to go to the big brand name school to get a great education. Now and this is something that I would like to make sure that we continue to carry on this conversation because there are ways to do this and be just as effective not spending as much money and people really need to hear that message. John's website is mycollegecorner.com. John always great to have you on the program. A lot of great to be with you. Thanks a good way to close the summer look forward to the fall. Absolutely. This is Bob Brooks and you are listening to the prudent money radio show. Thanks so much for joining me today you know I do appreciate it. You've got a question for me please go to the website www.prudentmoney.com and send it in because we are all out of time. We do me to get next time keep the faith and have a great rest of the day. That's all the time we have for today. Questions or comments for Bob or to find out more great information like what you've just heard. Visit www.prudentmoney.com. Be sure to join Bob Brooks again for the next edition of Prudent Money.